Sir Fred Goodwin, the former Royal Bank of Scotland chief executive, is already drawing a pension of £650,000 a year, even though he is only 50, it emerged last night. Goodwin was awarded a £16m pension pot by the bank when he left last year, allowing him to claim the pension with immediate effect, but has since become the public face of the banking crisis.

Last night the treasury minister Stephen Timms said the current RBS board was "extremely concerned" by the revelation, which threatens to undermine government claims that it would not reward failure. Timms said that UK Financial Investments, which manages the government's almost 70% shareholding, had been working with the new RBS chairman "to see what scope there may be for clawing back some of this payment".

A spokesman for the bank said it was taking its own legal advice "in respect of Sir Fred Goodwin's contractual arrangements."

The chairman of the Commons treasury committee, Labour MP John McFall, said: "I think there is a case for redress here. There should be a clawback. I have no doubt about that."

But the senior Tory on the committee, Michael Fallon, told Newsnight: "Ministers must have known this when they took over the bank back in October."

News of the pension coincided with revelations that talks over the terms of a £500bn insurance scheme for troubled bank assets had reached a critical phase, with RBS wrangling over the cost and structure of its protection scheme.

As RBS prepared to announce a record-breaking £28bn loss today, its executives remained locked in discussions with the Treasury to establish now many shares the Edinburgh-based bank would need to issue to pay for the insurance, and how big a loss on its toxic assets it would have to bear before the protection took effect.

Amid hope an agreement could be sealed in the early hours of the morning, the Treasury was urging RBS to sign up to the so-called "asset protection scheme", which it hopes could become a model internationally. RBS had originally been expected to insure £150bn of assets, but is now expected to put as much as £350bn into the scheme.

The bank is likely to pay for the insurance by issuing shares which do not carry voting rights but pay dividends. If it was forced to issue ordinary shares, the cost of the insurance would effectively require the government to take full control , a situation the chancellor, Alistair Darling, said yesterday that he wanted to avoid.

RBS is expected to agree to lend at least £20bn more as one of the conditions for more taxpayer money being used to help banks through the crisis.

RBS is expected to confirm a radical restructuring. Its new chief executive, Stephen Hester, is expected to announce today that he has hired Nathan Bostock, who resigned yesterday as finance director of Abbey National, to run some £300bn of assets earmarked for disposal or closure.

Hester is expected to shrink the bank by at least 25% and depart from 30 of the 60 or so countries into which RBS had moved. Up to 20,000 staff may face the axe.